Tom Parette

Everyone loves when the stock market goes up, we love to  see the value of our portfolios grow.  But we all know the market does not go up linearly and there are market corrections and even prolonged down markets.  In this article we will discuss why a market correction can be beneficial for retirees needing to move assets from pre-tax accounts to Roth accounts also known as “Roth conversions”.  This model also applies to moving funds to a taxable account as well.  

Millions of Americans have taken advantage of tax deferred savings such as employer 401K plans, IRA’s 403B plans, etc. and have a significant amount saved for retirement.  Generally these accounts are funded with mutual funds but often a conversion has taken place to a traditional IRA post-retirement which will contain mutual funds, ETF’s or individual stocks.  These pre-tax investments need to eventually be moved from the pre-tax accounts with it becoming a taxable event.  If the investor does not do this proactively, eventually the RMD rules will begin to make these events take place.  The goal is to properly time moving these assets to minimize the eventual tax impact that will take place.  

This is where “in-kind conversations” in a down market reduces the tax impact of the inevitable.  As an example, if you are moving $100k worth of stock, or mutual fund value, and the value of that asset is decreased at the time you move the asset, you will pay tax on that reduced amount.  In the example below a 15% reduction in the asset price at the 22% tax bracket will save $3300 in taxes.  

$100000 in the 22% tax bracket, $22000 tax liability 

vs a 15% stock price pullback

$85000 in the 22% tax bracket, $18700 tax liability

$3300 tax savings 

State taxes, if applicable will have the same positive impact.  

Another consideration is the in-kind conversion also will reset the cost basis of the asset once moved which may become important for a conversation to a taxable account if you plan to sell the asset and incur capital gains.  

In conclusion, if you are contemplating moving your pre-tax assets to either a Roth IRA or taxable brokerage account, consider waiting for a market pullback to do in-kind conversions and take advantage of down markets to minimize the tax impact of what you will ultimately need to do.